Current Context: On 7 October 2026, the Reserve Bank of India’s Monetary Policy Committee (MPC) raised the policy repo rate by 25 basis points from 5.25% to 5.50%. This was RBI’s first repo-rate hike in nearly four years, as inflation pressures increased due to factors including higher crude oil and food prices.
Key Points:
- What changed? The repo rate was increased by 25 basis points (0.25 percentage point) to 5.50%. A higher repo rate raises the cost at which banks borrow short-term funds from RBI and can eventually make loans more expensive.
- Policy stance changed: The MPC shifted its monetary-policy stance from neutral to calibrated tightening, indicating greater focus on containing inflation while keeping future decisions dependent on incoming economic data.
- Why did RBI raise the rate? Inflation risks had increased because of higher crude-oil prices, weaker monsoon conditions and food-price pressures. RBI projected inflation to average around 5.8% over the next three quarters.
- Growth outlook: Despite tighter monetary policy, RBI projected India's real GDP growth at 7.1% for FY 2026-27, reflecting continued strength in domestic economic activity.
- Liquidity decision: RBI did not raise the Cash Reserve Ratio (CRR). It indicated that surplus liquidity could instead be managed through instruments such as open market operations, variable-rate reverse repos and foreign-exchange operations.
- Why is this significant? The increase marked a reversal from the preceding easing/steady-rate phase and signalled that inflation control had become a stronger monetary-policy priority.
- Repo-rate impact: A rate hike can lead to higher home, vehicle and business loan rates, moderate credit demand and help reduce inflationary pressure by slowing aggregate demand.
Question:
Q1.In the October 2026 bi-monthly monetary policy, RBI increased the repo rate by 25 basis points to:
a) 5.00%
b) 5.25%
c) 5.50%
d) 5.75%
Correct Answer: (c) The MPC raised the policy repo rate from 5.25% to 5.50%, its first increase in nearly four years, amid rising inflation risks.
